Recent Posts

As this fall’s presidential election takes shape as a contest
between Barack Obama and Mitt
Romney, the rhetoric out of both camps is becoming sharper
and more ideological.

Looking to exploit Governor Romney’s increasingly close
association with Wisconsin representative Paul
Ryan (who has been mentioned as a potential vice presidential
nominee), the President dedicated a lengthy address earlier this
week to specifically heap scorn on Ryan’s budget plan (Ryan is
the chairman of the House Budget Committee).

The attack lines used by the President not only reveal a preview
of the fall campaign but also offer a glimpse of Obama’s skewed
views of the social and economic history of the United States.

The President laid bare his beliefs that America’s source of
economic strength has been her historical embrace of collective
action, wealth redistribution, and government policies that have
protected workers from the ravages of the wealthy. To reiterate,
he was talking about the United States, not Soviet Russia. He
asserted that prosperity “grows outward from the middle class”
and that it “never trickles down from the success of the
wealthy.” Accordingly, he concludes that our recent struggles
stem from the Republican-led abandonment of these successful
policies.

In reaching these conclusions Obama relies on classic “wet
sidewalks cause rain” reasoning, and assumes that an effect
can be the father of the cause. But as we debate how to move the
American economy out of the rut in which it is trapped, it’s
important to know where to put the cart and where the
horse.

To illustrate his point, Obama singled out auto pioneer Henry
Ford, who famously paid among the highest wages in the world at
that time his company began churning out Model T’s. By paying
such high wages Obama believes Ford created consumers who could
afford to purchase his cars, thereby giving business the ability
to grow. Based on this understanding, any program that puts money
into the pockets of the average American consumer will be
successful in creating growth, especially if those funds can be
taxed from the wealthy, who are less likely to spend. Obama
argues that Republican proposals that reign in government
spending, and cut benefits to the middle or low incomes,
are antithetical to this goal.

While it is true that the American middle class rose in tandem
with her economic might, it was the success of the country’s
industrialists that allowed the middle class to arise. Capitalism
unleashed the productive capacity of entrepreneurs and workers,
which brought down the cost of goods to the point that high
levels of consumption were possible for a wider cross section of
individuals. While Henry Ford, as Obama noted, paid his
workers well enough to buy Ford cars, those high wages would
never have been possible, or his products affordable, if not for
the personal innovation he, and other American industrialists,
brought to the table in the first place.

The economists that Obama follows believe that business will only
create jobs once they know consumers have the money to buy their
products. But just as wet sidewalks don’t cause rain, consumption
does not lead to production. Rather, production leads to
consumption. Something must be produced before it can be
consumed.

Human demand is endless and does not need to be stimulated into
existence. Suppose you want a new car, but then you lose your job
and you decide to forgo the purchase. Has your desire (or demand)
for the car lessened as a result of your diminished employment
circumstances? If you are like most people, you still desire the
car just as much, but you may decide not to buy it because of
your reduced income. It’s not that you no longer want the car (if
someone offered it to you at 90% below the sticker price, you
might still buy it). It’s that you have lost the ability to
afford it given its price and your income. The best way to
transform demand into consumption is to lower prices to the point
where things become affordable. Efficiently operating industries
increase supply and bring down prices. This is what Ford did 100
years ago and Steve
Jobs did much more recently.

But by introducing revolutionary manufacturing processes for the
mass production of low-end vehicles, Ford was able to drastically
lower the price of a product (cars) that were previously
available only to the wealthy. Ford didn’t create desire to buy
cars, that existed independently. But he greatly expanded the
quantity of inexpensive cars which allowed that demand to be
fulfilled through consumption. In the process he created wealth
for himself and his workers (his efficient techniques meant that
workers could demand high wages) and higher living standards for
society as a whole.

Obama believes that prosperity came only in the 20th century
after the government began redistributing wealth from rich people
like Henry Ford to the middle and lower classes. He ignores the
fact that America’s greatest growth streak occurred in the 19th
rather than the 20th century, and that America had become by far
the world’s richest nation before any serious wealth
redistribution even began.

The unfortunate part for the President is that wealth must first
be produced before it can be redistributed. But
redistribution always creates disincentives that result in less
wealth being created. All societies that have attempted to create
wealth through redistribution have failed miserably. This should
be obvious to anyone who spends more than a few minutes studying
world economic history. But the President is on a mission to get
reelected and his ace in the hole is to fan the flames of class
warfare. It’s a tried and true political strategy, and he looks
ready to ride that hobby horse until it breaks.